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Last Week on Wall Street – February 1st, 2025

  S&P 500: -1.00%      DOW:  +0.27%       NASDAQ:  -1.58%      10-YR Yield: 4.54%

What Happened?

U.S. equities ended the week mixed as markets navigated inflation data, tariff announcements, and a rebound in the tech sector. The S&P 500 fell 1%, the Nasdaq Composite dropped 1.6%, while the Dow Jones Industrial Average gained 0.3%. Early in the week, markets tumbled after Chinese AI startup DeepSeek introduced a low-cost, open-source AI model, raising concerns over reduced demand for high-end chips and data centers. The technology sector, which saw heavy selling on Monday, staged a partial recovery by the week’s end as investors reassessed the long-term impact of AI developments. Inflation data showed PCE rising 0.3% in December, reinforcing the view that the Federal Reserve may keep rates elevated longer, putting pressure on interest rate-sensitive sectors such as real estate and utilities.

Adding to volatility, President Trump announced 25% tariffs on Canada and Mexico and a 10% duty on China, impacting industrials, materials, and consumer discretionary stocks with significant global exposure. Energy stocks declined following weaker earnings reports and concerns over potential tariff-driven cost pressures. Meanwhile, the communications sector was the standout performer, driven by strength in digital advertising and streaming services. Looking ahead, investors will focus on corporate earnings from key sectors, Fed policy outlooks, and global trade developments, which could shape market sentiment in the coming weeks.

Fed Stands Pat on Rates, Entering New Wait-and-See Phase

  • The Fed maintained its benchmark rate at 4.3% after three consecutive cuts
  • President Trump called for immediate rate cuts, arguing they are necessary to support economic growth
  • The Fed reduced its 2025 rate cut projections from four to two

The key takeaway – The Federal Reserve opted to pause interest rate cuts, maintaining its benchmark rate at 4.3% following three consecutive reductions. Fed Chair Jerome Powell emphasized a cautious approach, stating that while inflation is expected to cool, policymakers need to see more concrete progress before considering further cuts. President Trump criticized the Fed’s decision, arguing for immediate rate reductions to support economic growth. Despite the pause, markets largely expected the move, with stock prices slightly declining and Treasury yields remaining steady. Investors remain divided on the Fed’s next steps, with some anticipating cuts later in the year if inflation continues to ease, while others see the possibility of no adjustments should price pressures persist.

The Fed’s strategy reflects its balancing act between preventing economic overheating and ensuring inflation continues its downward trajectory. Officials remain uncertain about how many cuts will be needed in 2025, with projections reduced from four to two. The central bank also faces the challenge of navigating potential economic disruptions from Trump’s trade policies, including proposed tariffs that could contribute to inflationary pressures. Meanwhile, long-term interest rates remain elevated, affecting mortgage and credit markets, raising concerns about the broader economic impact. The Fed’s cautious stance signals a measured approach to rate adjustments, with future moves hinging on inflation trends and overall economic stability. 

DeepSeek Sparks AI Stock Selloff; Nvidia Posts Record Market-Cap Loss

  • DeepSeek’s AI model launch triggered a major tech selloff
  • Markets stabilized as analysts questioned the severity of the reaction
  • Suspicion has arisen over how DeepSeek trained its model

The key takeaway – The launch of DeepSeek’s low-cost, open-source AI model triggered a major selloff in tech stocks on Monday, driven by fears that more efficient and affordable alternatives could disrupt the AI industry. Investors worried that the rise of streamlined AI models would reduce demand for expensive high-end chips and large-scale data centers, leading to Nvidia suffering the largest one-day market cap loss in Wall Street history, erasing $593 billion in value. The broader tech-heavy Nasdaq fell 3.1%, dragging down AI leaders like Broadcom, Microsoft, and Alphabet, while the Philadelphia Semiconductor Index saw its steepest decline since 2020.

Despite the sharp selloff, markets stabilized in the following days as analysts argued that the reaction may have been excessive. Some industry experts pointed out that DeepSeek’s AI is optimized for mobile and PC applications rather than data centers, where Nvidia and other semiconductor companies generate most of their revenue. Meanwhile, skepticism has emerged over how DeepSeek trained its model, with speculation that it may have leveraged OpenAI’s ChatGPT data, raising ethical and legal concerns. If proven, this could invite regulatory scrutiny and temper DeepSeek’s momentum, shifting the narrative from a disruptive breakthrough to a potential intellectual property battle. While competition in AI is expected to spur innovation, there are growing concerns over fair training practices and the long-term sustainability of open-source AI development.

Trump Tariffs on Canada, Mexico and China Begin Saturday, White House Says

  • White House press secretary Karoline Leavitt said Trump will be implementing 25% tariffs on Mexico and Canada as well as a 10% duty on China, in retaliation for “the illegal fentanyl that they have sourced and allowed to distribute into our country.”
  • The White House provided few details on exactly how the levies will be meted out, saying that they will be available for public inspection at some point Saturday. 

The key takeaway – President Donald Trump announced aggressive tariffs on major U.S. trading partners, imposing 25% duties on Mexico and Canada and a 10% tariff on China, citing their role in the distribution of fentanyl into the U.S. The White House provided limited details on the implementation process, stating that further information would be released on Saturday. The announcement led to a sharp market reaction, with the Dow Jones Industrial Average dropping over 300 points and the S&P 500 and Nasdaq also turning negative after early gains. While the administration framed the tariffs as a fulfillment of campaign promises, the absence of exemptions contradicted earlier reports that suggested potential exclusions.

Economists and Federal Reserve officials expressed concerns that the tariffs could reignite inflation just as price pressures appeared to be stabilizing. The Commerce Department reported a 2.6% increase in a key inflation measure for December, though underlying data showed signs of improvement. Fed officials emphasized the need to assess the economic impact of the tariffs, with Governor Michelle Bowman noting the importance of understanding their implementation and consequences. Chicago Fed President Austan Goolsbee warned that the key concern would be whether these tariffs remain isolated or escalate into broader trade conflicts with retaliatory measures. 

From Around the Watercooler